Financial Stability Report - RBI

Why in news?

Reserve Bank of India has recently released the financial stability report.

What are the highlights?

• NPA - RBI report warns that the gross non-performing assets (GNPAs) could rise.
• The GNPAs of scheduled commercial banks could rise from 11.6% in March 2018 to 12.2% in March 2019.
• This would be the highest level of bad debt in almost two decades.
• It is more worrying for GNPAs of banks under prompt corrective action framework.
• It is expected to rise to 22.3% in March 2019, from 21% in March 2018.
• Capital - GNPAs will increase the size of provisioning for losses and affect banks' capital position.
• The capital to risk-weighted assets ratio of the banking system as a whole is expected to drop.
• It could come down from 13.5% in March 2018 to 12.8% in March 2019.
• Bank frauds - RBI notes that more than 85% of frauds could be linked to PSBs.
• But, their share of overall credit is only about 65%.
• The PSBs are far more prone to fraud than the private banks.
• This is significant in light of the recent Punjab National Bank scam.
• It is possibly due to the corporate governance issues in public sector banks.
• This also largely contributed to the weak lending practices, the core of the NPA crisis.

What are the concerns?

• Banks - NPA crisis has affected the banking system and impeded credit growth in the economy.
• It was expected to be reaching to the lowest levels.
• But RBI report comes as a caution to the health of the banks and the economy.
• Economy - Economy has registered a healthy growth rate of 7.7% in the recent quarter.
• The deteriorating health of banks is in contrast to the recovering economy.
• External risks - The RBI, however, has warned about the rising external risks.
• It poses a significant threat to the economy and to the banks.
• Credit has already started to flow out of emerging markets such as India.
• This is due to the
  1. tightening of monetary policy by the US Federal Reserve
  2. increased borrowing by the U.S. government
• Prices - The increase in commodity prices is another risk on the horizon.
•  This could pose a significant threat to the rupee and the fiscal and current account deficits.
• All these factors could well combine to increase the risk of an economic slowdown.
• It could, in turn, exert pressure on the entire banking system.

What is the way forward?

• RBI expects improvement in the capital position of banks with

1. the government’s recapitalisation plan for banks
2. the implementation of the Insolvency and Bankruptcy Code

• But beyond these, government should consider changes to aspects of operational autonomy and the ownership of PSBs.
• The governance reforms at PSBs, if implemented, can help improve their financial performance.
• It could also reduce their operational risks.

Source: The Hindu

Quick Facts

Gross and Net NPAs

• Gross non-performing assets (GNPAs) refer to the sum of all the loans that have been defaulted by the borrowers within the provided period of 90 days.
• The net non-performing assets are the amount that results after deducting provision for unpaid debts from gross NPA.
• The GNPAs does not amount to the actual loss of the organization.
• But net non-performing assets amount to the actual loss, as the provision for unpaid loans has already been deducted.

Prompt Corrective Action (PCA)

• PCA is primarily to take appropriate corrective action on weak and troubled banks.
• The RBI has put in place some trigger points to assess, monitor and control banks.
• The trigger points are on the basis of CRAR (a metric to measure balance sheet strength), NPA and ROA (return on assets).
• Based on each trigger point, the banks have to follow a mandatory action plan.
• It prohibits them from undertaking fresh business activities such as opening branches, recruiting talent or lending to risky companies.
• RBI could take discretionary action plans too apart from these.